Creating Your Watchlist ( Universe of Stocks )

Some people like to trade the same stock over and over throughout the trading day. Traders tend to get a good feel for how one particular stock moves. A trader becomes familiar with its reoccurring support and resistance areas from trading the same stock repeatedly for a week, month, or even year. The trader knows from previous experience which market makers are the real buyers or sellers, and they know when the market maker has finished filling a big order. Becoming familiar with only one stock gives the trader an advantage over people trading more than 30 different stocks, chasing ticker symbols of companies they have never even heard of before.
It is a good idea for a rookie trader to master trading one single stock before creating a large watch list and following stocks with which he is unfamiliar. New traders need all the advantages they can get. I recommend trading a stock that mimics the futures, whether it is the S&P or Nasdaq Emini. As of this writing, Sun Microsystems (ticker symbol SUNW) is a stock that mimics the S&P E-Mini futures almost exactly tick by tick.

Once the trader masters trading one stock, it is time to move on to the next level: creating a watch list of approximately 30 stocks. You can also create a smaller list of say five stocks; then add five more stocks every month until you are comfortable with a list of approximately thirty. If adding five stocks a month is too many new symbols for you to become familiar with, add only as many to your list as you feel comfortable following.

Assuming we now have a list of 30 stocks, sort them with the trading software to place the strongest stocks at the top of the list with the weakest stocks at the bottom. The watch list should have a diversity of stocks from at least three different sectors. The great thing about sorting stocks from the strongest to weakest is that you can immediately look at your watch list and see which sectors are the strongest and which stocks in that sector have relative strength. You can also do the same for the weakest group, finding which stock in the weakest sector has relative weakness.

Say we have five semiconductor stocks at the top of our watch list and the bottom four stocks on the list are from the software sector. If the market suddenly starts to rally, we now know that buying stocks in the software sector is not a good idea because they are showing relative weakness. We know that the semiconductors on our watch list are showing relative strength, so we look to go long the strongest stock on our list. If the stock on the very top of the list had a very large gap at the open, you would consider going long the second or third stock from the top of the list in the same sector, because extremely large gaps add risk. You can also scan the charts of stocks from this sector that appear somewhere in the middle of the list, looking for familiar chart patterns you are comfortable trading. The opposite is true if the market is selling off.

There is a sector of stocks that each trader feels most comfortable trading; for me it is the software sector. To identify which sector is best for you, review all the trades you made in the last two months and note the sector that had the greatest number of winning trades. Then identify which single stock in this sector made you the most profits. Analyze your best winning stock to see what average price and volume it traded during the past two months. Now you know which sector you are more likely to make the most money in, the stock price at which you have the best odds trading, and the average volume of a stock you feel the most confident trading. You know what you need to continue doing right.

The next step is to identify what you are doing wrong and to correct it immediately. Look at your past two months of trading history and pinpoint your biggest losing sector. Delve deeper and select the stock from this sector that caused you the most pain (financial loss). If in the future you find yourself about to get into a position in this particular stock, say to yourself, âI do not understand the movements of this stock, I do not wish to lose money, and I will not get into this position.â Understand that history repeats itself and you should try not to repeat painful mistakes. You should not trade the stock that causes the greatest pain because of your emotions; you will want revenge. I am not saying you should never trade this stock again. I just want you to realize where you are loosing most of your capital.

There has to be a reason why you consistently lose trading a certain stock. Until you know the reason, stay away. The best market makers usually control our demon stocks. They have thick wallets and can randomly manipulate the stockâs price compared to the futures for no reason whatsoever. How can you make profits from a stock that does not follow chart pattern setups?